Resident Fellow Desmond Lachman

Martin Wolf's case against the early withdrawal of fiscal stimulus would have been all the stronger had he considered another distinct possibility. There is the all too real risk that the global economy, and especially that of the United States, will again stall once the initial fiscal stimulus fades and once the inventory build-up has run its course.

The primary risk to the global economy comes from the unusually large gaps presently characterizing the US labor market. Including part-time workers unable to find full-time employment, the US unemployment rate has risen to a staggering 16 and 3/4 percent. These labor market gaps, which must be expected to persist in 2010, are already causing US household income growth to decelerate at its fastest pace in the post-war period.

Stagnating or falling incomes would constitute a serious problem for the US economic recovery at the best of times. However, these are hardly the best of times for the US consumer. With household debt levels at around 135 percent of their incomes, US consumers have never been as indebted before as they are today. Making matters all the more serious is the fact that they are still reeling from the recent destruction of around 100 percent of GDP in their wealth as a result of sharply lower home and equity prices.

The US households' presently very constrained balance sheet position, along with markedly tighter credit conditions for the US consumer, must make one think that US households will continue to try to rebuild savings to the detriment of any growth in consumer demand much as they have done over the past nine months. In the context of weak consumer demand, it is difficult to envisage how the US economic recovery can be anything but anemic, particularly considering that consumer demand still accounts for around 70 percent of overall US aggregate demand.

Further clouding the US economic outlook is the fact that a feeble US economic recovery will almost certainly delay the healing of the US financial system. Today's high unemployment level is already substantially compounding the loan loss problems of the commercial banks. At the same time, the US commercial property market appears to be in virtual freefall, even before a large volume of commercial property market loans are set to fall due in 2010, while an expected new wave of home foreclosures in the months ahead is likely to delay the eventual stabilization in US home prices.

Mindful of the very real risks to the US economy, it would seem that at the upcoming Pittsburgh G-20 summit policymakers should go beyond discussing whether it is premature to withdraw policy stimulus. Indeed, it would not seem premature for them to consider how they should respond should the US economy in fact again stall early next year.

Desmond Lachman is a resident fellow at AEI.